Breaking

Ex-Lawyer Rothstein Says Funds Didn’t Warn Investors

(Corrects to show Rothstein said he didn’t consider the
funds to be co-conspirators in third paragraph of story
published Dec. 31.)

Dec. 31 (Bloomberg) -- Scott Rothstein, the Florida lawyer
sentenced to 50 years in prison for running a $1.2 billion Ponzi
scheme, said officials at three Manhattan hedge funds helped him
prop up the fraud in its final months, according to transcripts
of a court deposition.

Rothstein, 49, said his scheme began to collapse early in
2009, when he could no longer pay customers. Officials at
Platinum Partners Value Arbitrage, Centurion Structured Growth
LLC, and Level 3 Capital Fund agreed not to tell potential new
investors he failed to make payments to them, he testified.

“The funds were going to give us a positive credit
rating,” he said in testimony released Dec. 28. “We were going
to use as much of the new money coming in to pay them off, and
in fact that’s what we did.” Rothstein was later asked about
“false exculpatory e-mails” he had sent to co-conspirators.
Eliot Lauer, a lawyer for Platinum and Centurion, asked
Rothstein if he was correct in saying no such e-mails were sent
to the hedge funds. Rothstein told Lauer he “did not consider
your clients to be co-conspirators.”

Rothstein, who has been disbarred, was questioned with the
approval of U.S. Bankruptcy Judge Raymond B. Ray in Fort
Lauderdale, Florida, on how the scheme worked and who knew about
it, as victims seek money from those with knowledge of the fraud.

Behind Closed Doors

The questioning took place behind closed doors in a Miami
courtroom. Transcripts are being released on the website of the
plaintiffs’ law firm Conrad & Scherer.

Rothstein said that, in hopes of a reduced sentence, he was
telling prosecutors about everyone involved in his scheme and
about police officers and others whom he bribed with cash or
encounters with prostitutes.

A recommendation from Centurion, Platinum and Level 3 would
have been a lie because he had stopped paying them, Rothstein
said. He said Meir Nordlicht, Platinum’s chief investment
officer, and Jack Simony, a portfolio manager, agreed to help.

“My only concern was that, at the end of the day, they
would lie for us,” Rothstein said. “That was my concern. They
didn’t want this to blow. I didn’t want it to blow up. I had
been assured by Mr. Simony and Mr. Nordlicht that they would not
let it blow up.” Ray Casas, a spokesman for the funds, said
Rothstein gave inconsistent accounts and the executives didn’t
lie about the fraud.

‘Absolutely False’

“Mr. Rothstein’s claims that the funds or their managers
would lie for him are absolutely false and are flatly
inconsistent with his unequivocal statement that the funds were
not his co-conspirators,” Casas said Dec. 29 by e-mail. “He
admits he has no knowledge that anyone at the funds lied for him,
and not a single one of the dozens of investors in Rothstein’s
scheme has said that the funds recommended the investment to
them.”

Rothstein, Casas said, “also complained to one of his
alleged co-conspirators -- but not the funds -- that the funds
were refusing to talk to new investors. This is not the conduct
of a hedge fund looking to lure in new investors.”

Casas cited an exchange in which Lauer, the fund lawyer,
questioned Rothstein about a conversation with Nordlicht.

“Your best recollection is that if prospective investors
or new investors would contact him, he would not give it a bad
rating?” Lauer asked.

‘The Right Thing’

“No, he said he would do the right thing,” Rothstein
replied.

Rothstein acknowledged that he wasn’t present when anyone
from the hedge funds spoke to new investors. He said the
investors told him they had received positive reviews from the
funds.

Simony and Nordlicht haven’t been charged with any crime.

Victims believed they were buying stakes in settlements of
sexual and employment discrimination claims that Rothstein’s
firm, Rothstein Rosenfeldt Adler PA, had investigated for
possible lawsuits. The cases and settlements were fictional.

The scheme collapsed at the end of October 2009 and
Rothstein briefly fled to Morocco. He returned and surrendered
to federal authorities. After pleading guilty in January 2010 to
five counts of wire fraud, conspiracy and racketeering, he was
sentenced to 50 years in prison.

He is in the federal witness-protection program because of
assistance he provided to prosecutors investigating organized-crime figures, according to court papers.

‘Die in Prison’

“If I lie and get caught lying, even a little bit, I will
die in prison,” he said when attorney Sam Rabin questioned his
credibility. Rabin represents a former T.D. Bank regional vice
president who Rothstein said helped him pull off the fraud.

Rothstein’s firm was forced into bankruptcy by his
investors. More than 30 lawsuits were filed by the bankruptcy
trustee and groups of investors.

The confidence man was questioned by William Scherer, an
attorney for a group of investors that sued Centurion, Platinum
and Level 3 claiming they knew of the scheme and should disgorge
money they took before the law firm’s bankruptcy.

The three funds invested a total of $180 million and had
about $100 million at stake when the scheme almost collapsed in
the spring of 2009, Scherer said.

“And at the end of the crash, they got it all back except
about $18 million?” the lawyer asked.

“Yes,” Rothstein replied. He recalled that “they were
just $18 million shy,” he said.

Client Losses

Scherer said his clients lost $180 million.

The three funds sued TD Bank, a U.S. unit of Canada-based
Toronto-Dominion Bank, where Rothstein claimed to have
settlement funds in escrow accounts. The funds claimed bank
employees gave false statements saying the accounts contained
“hundreds of millions of dollars.”

The bank asked for dismissal of the case, saying the claims
are “factually vacant and legally insufficient.”

Seven of Rothstein’s employees and associates have been
charged to date in the scheme. Five pleaded guilty and were
sentenced. A federal prosecutor attended the deposition and kept
Rothstein from answering some questions because of the
investigation.

Investors with claims against the law firm are trying to
find out where Rothstein spent sizable amounts of cash he kept
in the office, with an eye to claiming that some was paid to
abettors of the fraud and should be returned.

Rothstein said he bribed law officers and judges and that
he laundered money for organized-crime figures. The prosecutor
didn’t allow him to name anyone.

Rothstein said he paid for female “escorts” for police
officers and didn’t worry about being caught.

He said he tried to stop his employees’ dealing in
marijuana, which he said was common at the firm.

“In the office, in the garage, outside the office, I had
some partners that couldn’t come to work without smoking pot,”
he said. “I also found out they were actually dealing drugs in
the office. I actually tried to put a stop to that.”

Rothstein said he worried the drug dealing might get
someone’s attention. He didn’t worry about the prostitutes in
the office.

Rothstein went on: “Pot, not a great idea in the office.
It troubled me, probably because they were actually dealing the
pot out of the office while I was in the middle of running a
several-hundred-million-dollar Ponzi scheme.”